Energy transition under scenario uncertainty: a mean-field game of stopping with common noise

• Published in: Mathematics and financial economics Vol. 18; no. 2-3; pp. 233 - 274
• Main Authors: Dumitrescu, Roxana, Leutscher, Marcos, Tankov, Peter
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01.08.2024
• Subjects: Applications of Mathematics; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Finance; Insurance; Macroeconomics/Monetary Economics//Financial Economics; Management; Mathematics; Mathematics and Statistics; Quantitative Finance; Statistics for Business; Partial information; 91A13; Mean-field games; 91A55; Optimal stopping; Energy transition; Electricity market; Common noise; 91A80; C73; Q42; Scenario uncertainty
• DOI: 10.1007/s11579-023-00352-w
• ISSN: 1862-9679

We study the impact of transition scenario uncertainty, namely that of future carbon price and electricity demand, on the pace of decarbonization of the electricity industry. To this end, we develop a theory of optimal stopping mean-field games with non-Markovian common noise and partial observation. For mathematical tractability, the theory is formulated in discrete time and with common noise restricted to a finite probability space. We prove the existence of Nash equilibria for this game using the linear programming approach. We then apply the general theory to build a discrete time model for the long-term dynamics of the electricity market subject to common random shocks affecting the carbon price and the electricity demand. We consider two classes of agents: conventional producers and renewable producers. The former choose an optimal moment to exit the market and the latter choose an optimal moment to enter the market by investing into renewable generation. The agents interact through the market price determined by a merit order mechanism with an exogenous stochastic demand. We illustrate our model by an example inspired by the UK electricity market, and show that scenario uncertainty leads to significant changes in the speed of replacement of conventional generators by renewable production.